The number of people and income are rising steadily
Zhonghui Group FY23 revenue in the first three quarters (September 2022 to May 2023) increased 16.1% to 1.46 billion yuan (RMB, the same below), roughly in line with our expectations. Among them, the income proportion of higher education / secondary education / non-education is 84.2% / 12.2% / 3.6% respectively. The main reasons for the high income growth are: 1) the spring enrollment of Sichuan City Vocational College is higher than expected; 2) the income of secondary vocational education increased by 29.6% compared with the same period last year. The total number of students in the company is 87000, an increase of 11.6% over the same period last year. Revenue in the first three quarters accounted for 76.1% of our projected annual income. The gross profit margin in the first three quarters was 50.4%, thanks to rising campus utilization and cost control measures.
Capital expenditure increased slightly during the year
2023x24 the total number of places in Chinese Business School and Chinese Business Vocational College is 12000 and 11000 respectively, and the enrollment number of Sichuan City Vocational College is 12000. The number of students this year is higher than expected because regulators aim to increase enrollment in vocational education and reduce unemployment. Capital expenditure in the first three quarters totaled 580 million yuan, and the company predicts that capital expenditure for the whole year will increase slightly to 600 million-700 million yuan, mainly used to speed up the expansion of dormitory buildings in Sihui campus. By the end of May, the ratio of interest-bearing assets to liabilities had risen to 26%.
Continue to promote industrial colleges and push up the employment rate
According to the market orientation and market demand, the company and the industry leading companies set up school-enterprise cooperation projects and industrial colleges to train applied talents for the society. The company has medical beauty, cross-border e-commerce, animation games, infant education, cloud accounting, intellectual health and other industrial colleges, committed to making schools familiar with the operation of the industry as soon as possible. In June, the National Development and Reform Commission, the Ministry of Education and other departments jointly issued the implementation Plan for the Enhancement of Industry-Education Integration in Vocational Education (2023-2025), which once again clearly encourages deep cooperation between enterprises and vocational education colleges. We expect that the company's industrial colleges will be further expanded in the future and will contribute new sources of income to the company in the longer term.
Maintain buy rating; target price raised to HK $5.44
Due to the higher-than-expected number of students by the end of May, we raised the FY23E / FY24E revenue forecast by 1.9% / 2.3% respectively; in view of the company's increased capital expenditure, we slightly reduced the FY23E / FY24E gross margin level and increased operating expenses. Finally, the net profit of FY23E / FY24E increased by 1.1% / 1.1% respectively, an increase of 12.8% / 13.8% over the same period last year. We have also rolled the target price valuation to FY24E, maintaining a forward-looking price-to-earnings ratio of 7 times and raising the target price to HK $5.44.
Investment risk
1: the uncertainty of choosing to be a "for-profit" school; 2: the uncertainty of the number of places given by the government to private vocational colleges.